Retirees and other investors seeking passive income are wondering how they can get good returns on their savings without paying more tax or being hit by the Old Age Security (OAS) clawback. One popular strategy to achieve the goal involves holding investments inside a Tax-Free Savings Account (TFSA).
TFSA limit increase
The TFSA limit will increase to $7,000 in 2024 from $6,500 in 2023. Investors who have qualified for the TFSA limit every year now have $88,000 in maximum cumulative contribution space. That will jump to $95,000 in 2024.
In addition, any funds removed from the TFSA during the year will open up equivalent new contribution room in the following calendar year. This is why it is a good idea to withdraw cash that is needed in the early part of a new year before December 31 of the previous year.
OAS clawback
Interest, dividends, and capital gains earned inside the TFSA are tax-free and can go straight into an investor’s pocket without worrying that the added income will bump the person into a higher marginal tax bracket or put OAS pension payments at risk of a clawback.
Seniors who collect OAS have to keep an eye on their total taxable earnings. The CRA implements a 15% OAS pension recovery tax on net world income that tops a minimum threshold. That number is $86,912 for the 2023 income year.
Dividend stocks and GICs
Investors have an opportunity in the current market conditions to get decent returns from Guaranteed Investment Certificates (GICs). Rates have started to pull back, however, and could plunge as soon as the Bank of Canada signals it will begin to cut interest rates. That being said, investors can still get rates above 5% for multi-year, non-cashable insured GICs offered by members of the Canada Deposit Insurance Corporation (CDIC).
At the same time, the steep pullback in the share prices of many great Canadian dividend stocks is giving investors a chance to get high yields from companies that have long track records of dividend growth.
Enbridge (TSX:ENB) is a good example of a good dividend stock that looks oversold.
The company just announced a 3.1% dividend increase for 2024. That extends the dividend-growth streak to 29 consecutive years. Investors who buy ENB stock at the current level can get a 7.7% dividend yield.
TC Energy (TSX:TRP) is another energy infrastructure company that has increased its dividend annually for more than two decades and intends to boost the payout by at least 3% per year over the medium term. The company just updated its 2023 outlook to say it expects financial results to be near the top end of its guidance. Despite the positive performance the stock is down 10% over the past 12 months. Investors can now get a 7.2% dividend yield from TRP stock.
The bottom line on TFSA passive income
The right mix of GICs and dividend stocks depends on a person’s risk tolerance, desired return, and need for access to the invested funds.
A diversified portfolio of laddered GICs and high-yield dividend stocks could easily provide an average return of 6% right now. That would generate $2,400 in tax-free passive income over the next year on a TFSA of just $40,000.
